Palo Alto Weekly

Paying the Silicon Valley way

Coupa Cafe customers can use bitcoins, a digital currency, to buy a cup of coffee

by Elena Kadvany

When paying for a latté — or any menu item — at Coupa Café in downtown Palo Alto, customers have two options.

One is the usual route: use cash or a card to pay. The second option? Pull out a smartphone and use an application to pay with bitcoins.

Bitcoins are an emerging digital currency. Generated electronically by computers, they can be exchanged freely between people without any intermediary. Without bank or government involvement, there are no chargebacks, prerequisites, fees, limits or delays.

"It's like when the Internet first started in the '90s," said Mike Landau, a Facebook software engineer who helped develop the technology that Coupa uses to accept bitcoins. He collaborated on the e-currency system with his close friend, Jean Paul Coupal, who owns Coupa Café with his mother and sister. Coupal and Landau met as undergraduates at Stanford University.

At the advent of the Internet, people understood phone-to-phone or computer-to-computer communication, but an entire decentralized network where people could connect, exchange and communicate was hard to comprehend, Landau said. The world of bitcoins is similar.

"Bitcoin does two things," Landau explained. "One is, it's a currency. But it's also a medium of transaction. You can imagine it being kind of like PayPal, but completely open source and decentralized. There's no one company that's in charge."

Like with PayPal, bitcoin users have an account, called a wallet (though it's a completely virtual one). Wallets are completely public but also anonymous, only connected to a user's "address," an encrypted string of letters and numbers. Users can have as many wallets as they'd like and can link them to bank accounts.

Users can buy and sell bitcoins on platforms such as Coinbase, a San Francisco-based company that allows consumers and merchants to exchange the currency. As of this week, there are more than 11 million bitcoins in circulation, a number that is steadily growing. The price of one bitcoin hovered around $97 this week, a dramatic number compared to less than a year ago. Last August, the exchange rate fluctuated between $9 and $10.

Users store bitcoins in their wallet and, similar to online banking, can send payments to other bitcoin users. When a payment occurs, other users within the network, called "miners," verify it. The entire exchange is permanently stored in the network.

"When you send bitcoin to someone you need to tell the network the transaction's numbers where you received the bitcoins you're sending," Landau explained. "They check that those transaction numbers have not been completely used up. In short, they are checking that all incoming transactions to your wallet minus all outgoing transactions remains positive. If it does, they confirm the transaction."

Participating miners are given new bitcoins for verifying transactions, which has the effect of bringing new money into the market and rewarding people who help the network, Landau said.

At Coupa Café's Ramona Street location — the only one so far that accepts bitcoins — customers who want to pay with bitcoins observe the same protocol.

At the cash register, the price of an order is quoted in both dollars (in black) and bitcoins (in green), just as if it were dollars and euros, Coupal said. To the right of the register is a small laminated card with Coupa's QR code, which is a two-dimensional barcode that looks like a square black and white maze of pixels. Customers use a bitcoin app called Blockchain to scan the QR code, which automatically enters Coupa's address.

Customers type in the desired payment amount and click "send." Instantaneously, a message appears on the screen of a smartphone propped on a stand behind the register: "You have received a bitcoin." This phone's sole purpose is to provide a stream of live bitcoin transactions for Coupa employees. As soon as a payment comes in, the employee behind the register can instantly verify it and close it out as a specific tender, just like choosing cash versus credit, in the café's system.

Though as of now Blockchain only works with Android phones (Apple is still reportedly wary of bitcoins), iPhone users can go through the same process on a browser, but have to either manually type in Coupa's address or copy and paste it.

Coupa has done more than $200 worth in bitcoin transactions since launching the system about a month ago, a good number considering most of the purchases are typically small amounts, Coupal said.

As it's still a relatively new currency — the original software was released in 2009 after a paper on bitcoins was written in 2008 by an anonymous hacker or hackers going by the pseudonym Satoshi Nakamoto — the bitcoin exchange rate fluctuates daily. This week, a small iced tea — $2.85 — went for 0.044 bitcoins.

Bitcoins' value is also controlled by limiting the amount that is created every day. Every 10 minutes, 25 bitcoins are produced. After a certain number of years, that number will be halved, and halved again and again until about 100 years down the line, no more bitcoins will be created. The idea: make a volatile currency predictable.

"A lot of people are debating whether that's a good idea or not," Landau said of the limited production. "So it doesn't necessarily have to flatten out to be predictable, but they wanted it to have certain properties to encourage people to save and basically to have the currency become more valuable in time, and one way to do that is through reducing the amount that's produced."

Fewer than 10 places in the nation accept bitcoins for coffee, out of 11 food establishments/restaurants total, according to bitcoin.travel, a website that tracks real-world businesses across the world that use the currency.

Coupa Cafe is also the only brick-and-mortar business in Palo Alto that takes bitcoins.

Though such growth is exciting for techies and anti-government libertarians, Coupal predicted that as the currency gains traction, "the system will have to overcome the hurdle of more U.S. government involvement and oversight."

In May, California's Department of Financial Institutions sent a cease and desist letter to the Bitcoin Foundation, a nonprofit that works on bitcoin software development. The letter warned that the foundation's involvement in money transmission without registration with the U.S. Treasury or the California Commissioner of Financial Institutions is a violation of state and federal law. Bitcoin users also speculate that, because bitcoins are not only a currency but a mode of exchange for goods and services, the Internal Revenue Service could soon start taxing transactions.

Editorial Assistant Elena Kadvany can be emailed at ekadvany@paweekly.com.